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With the UK government rapidly running out of time and options, it will have to push for much more aggressive action to support growth. Wednesday will mark a key turning point in the economic cycle with the 2013 budget statement. Scope for action on fiscal policy is extremely limited given the underlying deficit and, in this context, the burden will continue to fall predominantly on monetary policy. With the Bank of England inflation mandate likely to be re-examined, Sterling is likely to resume losses against the dollar with a slide towards 1.45.

The coalition government has two years to find sustainable growth and avert a rout at the next election. There will certainly be tinkering at the margins of fiscal policy with announcements of infrastructure spending, but the key takeaway from the budget is that options are very limited and that monetary policy will have to be extremely loose which will keep Sterling on the defensive.

Minutes from the Bank of England monetary policy meeting will be released on Wednesday. The decision is of course known as rates and the amount of quantitative easing were left unchanged. Nevertheless, the underlying breakdown of the voting and tone of rhetoric within the minutes will be extremely important for market sentiment. In particular, Bank Governor King's position will be very important following his decision last month to back additional bond purchases. King either rowed back from that call to wait for further government guidance or he was out-voted again on the committee. Comments on Sterling will be watched very closely with the bank more concerned over the pace of decline and the risks of a disorderly plunge. There is little doubt that they would prefer a weaker currency in the medium term.

Following the MPC minutes, the UK Chancellor will announce the 2013 budget at 12.30 GMT. This time last year, the government was expecting an economic recovery which would give some degree of flexibility on fiscal policy. Despite the brief flurry of optimism surrounding the Olympics, the economy has failed to deliver in spectacular fashion as it teeters on a triple-dip recession. The government now has much less room for flexibility and there are also much greater demands for a change in policy. Even by the normal standards of budget smoke and mirrors, it will be extremely difficult to salvage much in the way of good news with the underlying deficit likely to overshoot the 2012/13 fiscal target by around £8bn.

The government will try and present the budget as showing some flexibility while keeping the basic strategy intact. In this context, there will certainly be announcements of additional spending in high-profile capital projects. The government will also portray the budget as business friendly, but there will be a major crackdown on tax evasion as the Chancellor needs some positive spin following last year's PR disaster surrounding the 'pasty tax'.

Comments during the speech on Bank of England policies will be watched much more closely than usual, especially with continuing speculation that there will a move to make the central bank mandate more flexible. The clear intention of such a move would be for the central bank to take a much more aggressive monetary policy tone.

Source: Desperate Push For Growth Will Weaken Sterling